Fantasyland earnings forecasts

The upcoming deluge of corporate earnings reports started with a trickle this week and no surprises for guessing the big themes this year.

Weak global growth and exposure to Europe and the United States, the strong Australian dollar, costs and capital management top the watch-list for nervous investors as the big listed companies complete their half-year numbers.

Analysts’ forecasts for 2012 and financial year 2013 look way too high given the current economic conditions, recent profit downgrades and anecdotal evidence from corporate leaders.

This is normal. Equity strategists are like over-optimistic weather forecasters who promise sunny weekends because that’s what they want to happen even when they know it will probably rain.

Once again, the bullish earnings-per-share growth forecasts for industrial stocks in 2012 will be pared back in September after the last companies deliver their numbers and subdued outlooks for the year ahead.

The strategists at Bank of America Merrill Lynch, one of the more bearish at the moment, are right when they say the Australian market is typically too optimistic about earnings at the start of the year. This is why the ratio of earning upgrades compared to downgrades has been negative over the last decade.

EPS growth forecasts for 2012 currently average around 7 to 8 per cent. The last thing a brokerage wants to do is talk prospective buyers out of investing but most admit these numbers will be trimmed.

Tim Rocks at BoFA says 2012 EPS should be flat to down on 2011 numbers.

Related Quotes

Company Profile

Alesco
, which makes garage doors and several other building products, mentioned the word “tough" twice in its half-year earnings release this morning.

While it tripled profits, the company said it did not expect an improvement in housing renovation sectors in the short term.

Expect to hear the T word regularly when earnings season swings into full gear the week after next and it won’t just be confined to the retail sector.

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The great Mongolian stand-off between
Rio Tinto
and Ivanhoe Mines finally appears over.

Rio Tinto has this week taken majority control of its Canadian partner after a long and costly feud over Oyu Tolgoi, the world’s biggest copper and gold deposit. Ivanhoe owns 66 per cent of the project and the Mongolian government the remaining 34 per cent

The move, announced by Rio Tinto this morning, is good news for the global miner and finally gives potential investors in the massive project the certainty they need.

Development of the $6 billion project has already been delayed for years as Ivanhoe and the Mongolian government squabbled over royalties and ownership. This was further complicated in recent years by Ivanhoe’s efforts to stop Rio Tinto, which largely funded the project, taking over the company.

The extraordinary windfalls from a single project, which the Economist points out has transformed a population of just under 3 million people who were largely nomadic herders a generation ago, could just be the beginning.

The next phase for Mongolia is Erdenes Tavan Tolgoi, a massive state-owned coal deposit also in the South Gobi province. The Mongolian government reportedly wants to float Tavan Tolgoi in Hong Kong this year as it seeks funding. Companies like Rio Tinto and BHP Billiton will also have their eye on that opportunity.

While Rio Tinto has cleared a major hurdle there are still risks in Mongolia. Citi analysts point out this morning that while the project is 70 per cent built with production to start late next year, the availability of power could be a major stumbling block that stalls development.

The Mongolian government, which heads to elections in June, has also said it wants to increase its stake in the project to at least 50 percent.

Rio has no plans for a full takeover bid for Ivanhoe but is allowed to purchase up to 5 per cent of Ivanhoe shares on market over 12 months or buy an unlimited number from as many as five shareholders at a premium.